It has become almost routine for OTC Markets listed issuers to pay for consulting services with their restricted shares of common stock. The tradability of shares that can be issued to consultants is impacted by whether the company issuing the shares is reporting with the Securities & Exchange Commission (“SEC”) and whether the issuer has ever been a shell company (“Shell Company”) as defined by Rule 405 of the Securities Act of 1933, as amended.

Non-Reporting Issuers

For non-reporting companies, such as OTC Pink issuers, the company usually enters into an employment agreement with the consultant and/or service provider. The employment and/or consulting agreement should address the term of service, compensation and scope of services to be provided. Assuming the issuer is not presently and has never been a shell company, the shares can be resold after a period of twelve months in reliance upon Rule 144 of the Securities Act of 1933, as amended (“Securities Act”).

Shell Companies

Rule 144 imposes limitations on the use of Rule 144 by Shell Companies. If a company has at any time been a shell company, Rule 144 is unavailable until 12 months after the issuer files Form 10 information with the SEC.

SEC Reporting Companies

SEC reporting companies have more options than non-reporting companies when considering employee and consulting service plans. SEC reporting companies can use Form S-8 to register shares for services if certain requirements are met. In order to meet the SEC requirements of S-8 Shares, the OTC Issuer doing an S-8 offering must meet specific criteria.

Form S-8 Can Only Issued to Natural Persons

Shares registered on Form S-8 can only be used to compensate a natural person and not a corporation or other entity.

Form S-8 Can Only Be Used By SEC Reporting Companies Who Are Current

Most OTC Pink Sheet Companies are non-reporting issuers who file reports under the OTC Markets’ Alternative Reporting Standard. Due to a recent change in OTC Markets’ policies governing its OTCQB market tier, many SEC filers are now OTC Pink Sheet issuers. More information about these changes can be found here. To register shares on Form S-8, the issuer must must be “fully reporting to the SEC,” subject to the reporting requirements under Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and have filed all required reports and schedules for the prior twelve months or for such shorter period the issuer was obligated to file SEC reports.

Form S-8 Can Only Be Used In Connection with Bona Fide Services Not In Connection with Market Making or Capital Raising

Additionally, shares registered on Form S-8 can only be used to compensate employees or consultants who provide “bona fide services” to the Issuer. Lastly, the services provided by the consultant cannot be in connection with the offer or sale of securities in a capital raising transaction” and not “in connection with directly or indirectly promoting or maintaining a market for the Issuer’s securities, Form S-8 is subject to significant requirements including that the recipient of shares registered on Form S-8 including that the shares not be issued in connection with capital raising and market making transactions.

Tradability

One reason for the popularity of Form S-8 is that shares registered on Form S-8 are free trading upon filing of the registration statement so long as recipients are not Affiliates of the issuer. If received by an affiliate of the issuer, shares issued under S-8 are subject to Rule 144 volume limitations.

For further information about sponsoring market makers, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956 or [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.